Reference no: EM132591642

Question 1: Explain what a provision is according to IAS 37 'Provisions, Contingent Liabilities and Contingent Assets.' Include in your explanation a discussion of the recognition criteria and distinguish provisions from contingent liabilities.

Question 2: TAV plc recognized a provision in its financial statements for the year ended 31 December 2019 for the following pending lawsuit:

• At the beginning of 2019, former employees filed a lawsuit against TAV plc. The employees claim that they had been subject to hazardous working conditions while working for TAV plc. TAV plc does not deny that working conditions were hazardous but holds the employees accountable since their tasks comprised maintenance of the workplace. At the end of 2019, the lawsuit is still pending. TAV plc's lawyers expect TAV plc to be found liable and to have to pay damages to the employees with a probability of 55%. They further expect that, conditional on being found liable, TAV plc might be 'lucky' with a probability of 30% in the sense that the court acknowledges joint responsibility of the firm and the employees; or that TAV plc might be 'unlucky' with a probability of 70% in the sense that the court attributes sole responsibility to TAV plc. The lawyers expect damages to amount to £500,000 if the court acknowledges joint responsibility and to £5,000,000 if the court attributes sole responsibility to TAV plc. The estimates are based on outcomes of several prior lawsuits involving similar accusations as well as parties with similar financial resources.

Required:

i) Explain why TAV plc was correct in recognising a provision for potential claims from the lawsuit.

ii) Determine the amount of the provision and explain your steps.

iii) Prepare the journal entry for the initial recognition.

Question 3: Assume that you are supposed to rewrite the description of the lawsuit in b) so that it results in a contingent liability and not a provision. Explain at least two changes you could make to the description.

Question 4: Briefly explain the notion of financial performance as defined by the IASB. Discuss how treating potential claims from the lawsuit as provision or contingent liability impacts this financial performance.